Fluent Essays

AWARD-WINNING CASE — This case won the Best Case Award at the Administrative Sciences Association of Canada (ASAC) Case Competition, 2007. S w 9B06M064 TURNING AROUND ORGANIZATIONS IN A CRISIS: THE CASES OF TWO MAJOR ALBERTA ORCHESTRAS Tom Ewart prepared this case under the supervision of Professor Tima Bansal solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying information to protect confidentiality. Ivey Management Services prohibits any form of reproduction, storage or transmittal without its written permission. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Management Services, c/o Richard Ivey School of Business, The University of Western Ontario, London, Ontario, Canada, N6A 3K7; phone (519) 661-3208; fax (519) 661-3882; e-mail [email protected] Copyright © 2006, Ivey Management Services Version: (B) 2010-04-08 In 2002, the Calgary Philharmonic Orchestra (CPO) and the Edmonton Symphony Orchestra (ESO) each faced a financial crisis that threatened their existence. The Calgary Philharmonic and the Edmonton Symphony were the two major professional orchestras in the Canadian province of Alberta. Both non- profit orchestras had similar revenue levels and long histories in their similarly-sized cities. They also had similar financial difficulties. By the end of the 1990s, many North American orchestras, in cities of all sizes, were facing bankruptcy. Some people blamed the American Federation of Musicians, which had been called “an international union every bit as power hungry as any in the public sector.”1 Others blamed irrelevant business models, poor governance, bad management, and decreasing public and government support. By 2005, the Calgary Philharmonic and the Edmonton Symphony balanced their budgets. To recover from their respective crises, the CPO’s Transitional Leadership Team (led by the Board Chair, Interim Executive Director, and Chair of the Players Association), and the ESO’s Managing Director, Elaine Calder, had each made a series of decisions that they felt were best in their respective contexts; however, observers were divided on which organization was best positioned for stability and growth in the future. CALGARY PHILHARMONIC ORCHESTRA: SEEKING A NEW BUSINESS MODEL The Calgary Philharmonic Orchestra was formed in 1955 from the merger of the Alberta Philharmonic and the Calgary Symphony. At first, its audiences were small but enthusiastic. By 2001, it was performing for approximately 90,000 people per year in Calgary and around the world. In 2002, the CPO had 65 musicians and performed a wide range of musical styles, including classics, baroque, popular music and music geared to children. Structurally, the orchestra consisted of four groups: the musicians, the management staff, the volunteer board members, and an 80-member volunteer chorus. 1 “Grasping the Baton,” The National Post, April 26, 2002, A19. A u th o ri ze d f o r u se o n ly in t h e c o u rs e S tr a te g ic M a n a g e m e n t a t U n iv e rs ity C a n a d a W e st t a u g h t b y D r. S h e rr y C a m p b e ll fr o m 7 /1 2 /2 0 2 1 t o 1 0 /3 /2 0 2 1 . U se o u ts id e t h e se p a ra m e te rs is a c o p yr ig h t vi o la tio n . Page 2 9B06M064 THE CITY OF CALGARY Located approximately 100 kilometers east of the Rocky Mountains, the City of Calgary was a centre of bustling business activity (see Exhibit 1). It had been described as “cosmopolitan,” “Americanized” and “transient.” Most of Alberta’s oil and gas money flowed through Calgary and it was home to the second largest number of corporate head offices in Canada, particularly in the oil and gas sector. In 2002, the region’s 1.1 million inhabitants were relatively young (see Exhibit 2) and among Canada’s richest. The average disposable income per capita was Cdn$32,000,2 having grown at a compound annual rate of five per cent over the last five years. The population and disposable income per person were forecast to grow by 1.8 per cent and 3.2 per cent, respectively, over the same period. RECENT CHALLENGES AT THE CPO Although its home city was booming economically, the CPO faced significant challenges in the late 1990s and early 2000s. The Transitional Leadership Team, in place through the turbulent period of bankruptcy protection and the re-start of the 2002-03 interrupted season, explained some of the systemic problems: The CPO had been plagued by repeated financial crises over its 50-year history. The organization had survived these with no particular plan beyond emergency fundraising. . . In some years there were modest surpluses, while other years deficits were greater than $1 million. By the end of 2002, the accumulated operating deficit was between $6 million and $7 million. . . . . Typically, like most symphony orchestras, the CPO would encroach on the next year’s subscriptions by collecting subscription money early and spending it. In addition, the endowment3 was periodically raided when there were serious cash flow or other temporary financial crises. The tendency to raid the endowment was institutional. Prior to bankruptcy protection, the CPO Foundation’s Trustees were all members of the CPO board, with a few extras. The CPO board had effective control of the Foundation and the disposition of its resources. Some of the Trustees had contributed significantly to the endowment. While the CPO’s endowment had over $2 million invested in 1997, only $900,000 remained in 2002. Striking a Minor Chord with Musicians By mid-year 2001, the CPO’s board realized that its business model was unsustainable and that a crisis was looming. CPO posted a deficit of $650,000 in its fiscal year ending June 30, 2001 (see Exhibit 3). The orchestra’s labor contract with its union, the American Federation of Musicians of the United States and Canada, also expired that month. At the time, the average base pay of orchestra members was $40,000 per year. As part of ongoing contract negotiations, the CPO’s precarious financial position led its board to ask musicians for a number of immediate and ongoing concessions: a reduction in salary, a reduction in the season from 41 weeks to 38 weeks, and cuts to other benefits that totaled a 16 per cent reduction in overall compensation. The proposal also included eliminating one contract position, which was vacant at the time, 2 All funds are in Canadian dollars unless otherwise noted. 3 Endowments are common in the performing arts. They typically refer to permanent funds which, when invested, provide the organization with a steady stream of annual income. A u th o ri ze d f o r u se o n ly in t h e c o u rs e S tr a te g ic M a n a g e m e n t a t U n iv e rs ity C a n a d a W e st t a u g h t b y D r. S h e rr y C a m p b e ll fr o m 7 /1 2 /2 0 2 1 t o 1 0 /3 /2 0 2 1 . U se o u ts id e t h e se p a ra m e te rs is a c o p yr ig h t vi o la tio n . Page 3 9B06M064 from the total number of contracted musicians. The elimination of this one position was the main obstacle that led to a four-week lock-out. The president and CEO of the orchestra took a 15 per cent pay cut and the rest of the administrative staff took a 2 per cent pay cut. The board also committed to raising at least $10,000 themselves. After a limited number of negotiating sessions which included the use of a mediator, the musicians rejected the proposed contract and were locked out on October 7, 2001. Following a month of pickets, street concerts and negotiations, the CPO’s musicians returned to work on November 7, 2001, after agreeing to an 8.4 per cent pay cut in the 2001/02 season and a further 2.4 per cent pay cut in the 2002/03 season. They also agreed to a shorter season and one less paid vacation week in the 2002/03 season. (This amounted to a base salary of $38,950 in the 2002/03 season.) The number of musicians was to remain the same at 65. The musicians accepted a one-time payment of $2,500 each to make up for income lost through the four weeks of the lock-out. Eight months later, at the 2002 fiscal year end, the CPO posted another $650,000 deficit. The CPO’s Organizational Diminuendo By early September of 2002, as the CPO’s 2002/03 season4 began, it was clear that the organization’s business model was unsustainable. Ticket sales were down, despite repeated appeals for public support. The local press frequently reminded Calgarians that the orchestra had internal problems (e.g. the recent labor strife) and declining external support (subscriptions had fallen from 14,000 in 1997/98 to 3,000 in 2002). Another major factor in the bankruptcy protection filing was the fact that the CPO did not have sufficient cash to cover payroll to December and its line of credit was tapped out at $1 million. CPO’s board was in a position of financial liability and their insurance would not kick in unless the organization filed for bankruptcy protection. Directors could be liable for breaking the law (e.g., not paying wages and salaries), breaching contracts (e.g. not repaying loans) or for tort (e.g. irresponsibly releasing an employee). The CPO filed for bankruptcy protection on October 14, 2002, suspending all performances and laying off all musicians and staff. Musicians were informed of the bankruptcy protection via email after it had already occurred. Donna Finley, a strategic planner and change management professional, was recruited to the Transitional Leadership Team four days later to replace the outgoing president and CEO who had been fired. Finley explained the board’s reaction to the crisis: The people who were on the board at the time decided to address the fundamental root causes of the problems that plagued the organization for over 20 years. A number of board members were very committed to making the difficult changes that were necessary. Management was effectively being changed out at the time and had minimal involvement in the renewal process. REBUILDING THE CPO Finley and the board, under the watchful eye of the receiver, began rebuilding the organization, starting with the administrative staff and management team. The management ranks were largely decimated. Before the crisis, there were approximately 20 full-time equivalent positions in the back office [staff and management]. When I arrived, a skeleton team existed because most had quit or had been laid off. 4 The CPO and the ESO seasons typically ran from early September to mid-June. A u th o ri ze d f o r u se o n ly in t h e c o u rs e S tr a te g ic M a n a g e m e n t a t U n iv e rs ity C a n a d a W e st t a u g h t b y D r. S h e rr y C a m p b e ll fr o m 7 /1 2 /2 0 2 1 t o 1 0 /3 /2 0 2 1 . U se o u ts id e t h e se p a ra m e te rs is a c o p yr ig h t vi o la tio n . Page 4 9B06M064 The Transitional Leadership Team assessed the resources available to the CPO. The week following the bankruptcy protection announcement, several external consultants were engaged to immediately boost the management expertise of the organization and help with the rebuilding process. Finley listed some of the external experts and explained their roles: Targeted organizations were recruited into the renewal process. Some were compensated, some were partly compensated, some gave freely of their time. For example, Framework Partners Inc., provided the leadership for strategy development, project management, and change management. I was subsequently recruited as Interim Executive Director and to provide fundraising support. A receivership company and a law firm acted as the CPO’s legal counsel advising on lapsed contracts, the receiver’s offer to suppliers and customers, and litigation arising from these activities. Communications Inc. was engaged to help with external communications, rebranding and undertaking an organizational shift in marketing strategy. These external experts worked along with the musicians and other volunteers, contributing to the Renewal Plan and its initial implementation. They infused fresh energy, pride and capability into the organization. With these external professionals, volunteer musicians and board members, the CPO put together working groups to address a number of critical issues. This effort culminated about two months later, in the third week of December, when we produced a plan for renewal that was acceptable to the receiver, funders and broader community. The Renewal Plan was as much a sales and marketing document as it was a strategy document. The CPO’s Transitional Leadership Team took their renewal plan to the public, seeking community support for the rebuilding process. Over the next six weeks, the CPO raised $1.6 million in working capital, including $850,000 from the private sector and wealthy individuals. CPO also secured financial support from the municipal, provincial, and federal governments. The federal government, through Canadian Heritage, and the City of Calgary each made a $250,000 grant. The Alberta government, via the Alberta Foundation for the Arts, advanced $250,000 against future grants. This infused the organization with $750,000 in cash. As part of the Renewal Plan, the musicians agreed to waive any claims for compensation owed over the term of the bankruptcy protection and to complete the current interrupted season under the existing contract terms. However, it was necessary to negotiate a new contract for the following two seasons. As Finley explained: The level of fixed costs was unsustainable — very few of the costs were variable, giving the organization little flexibility. What changed with the Renewal Plan was the formula based pay of musicians and staff. Both took a 20 per cent pay cut from the rates of September 2002. We signed a three-year agreement with two quid pro quos. First, we agreed to retain the orchestra size at 65 musicians despite much pressure by funders to reduce the size. Second, we introduced a variable pay component based on financial performance in new markets (this equated to the surplus). These actions took some of the fixed burden off the revenue expense statement and provided for its contingent return to the musicians and staff, after some annual reinvestment in the CPO’s infrastructure. It’s a surplus sharing scheme. A u th o ri ze d f o r u se o n ly in t h e c o u rs e S tr a te g ic M a n a g e m e n t a t U n iv e rs ity C a n a d a W e st t a u g h t b y D r. S h e rr y C a m p b e ll fr o m 7 /1 2 /2 0 2 1 t o 1 0 /3 /2 0 2 1 . U se o u ts id e t h e se p a ra m e te rs is a c o p yr ig h t vi o la tio n . Page 5 9B06M064 After having the Renewal Plan accepted by the Court of Queen’s Bench of Alberta, my priorities were focused on hiring the permanent management team and initiating the implementation of the Renewal Plan. Mike Bregazzi, a former energy sector executive and consultant, was hired as the president & CEO in July 2003. His new slate of staff meant that the CPO did not have much institutional memory or continuity. That brought many challenges, but it also brought opportunities. Finley explained: There were few barriers from the past. The new team could play its own game. They could be creative and inventive, not just follow past procedures. And at the personal level, the organization could be staffed with people who were synergistic and sympathetic, people who could work together. While some musicians were skeptical that the CPO would ever achieve enough of a surplus to enable them to realize variable pay, others were optimistic that they would eventually see surplus sharing. For the musicians, though, the main goal had been achieved: maintaining the artistic integrity of the orchestra, which was directly related to maintaining the number of contracted musicians at 65. Bregazzi was confident that the surplus would be realized by the third year. A New Model for Stewardship Each of the four groups— the musicians and their conductor, the chorus and their conductor, staff and management, and the board — was an integral part of the CPO’s operations. Each contributed in unique ways to the CPO experience. When Bregazzi joined the organization in mid-2003, he explained the limitations of having the board too heavily involved: When I came on, the CPO board (for the last decade) was a hands-on board . . . . It was an operating board, not a governance board. There were board committees for everything: marketing, planning, development, programming . . . six to eight in total. They covered all parts of CPO’s operations. What emerged from the renewal process was. . . a board that was not as involved in operations matters. Emerging from [bankruptcy protection] in February of 2003, the board was reduced in number [33 members down to about 15] and changed in design, with only two standing committees, finance and governance[(instead of seven], and no executive committee. [The Plan also called for the Foundation’s board to be separated from the CPO’s board in order to avoid any conflict of interests.] I wrote a document that described the interface between board and management (see Exhibit 4). The appropriate delegation of administrative things went to management, who were hired to do the job. I insisted on that when coming on, that the new board would let those things go. That was the key change: hands-on to hands-off board. Positioning for Sustainability In February of 2003, the CPO’s performances resumed after an enforced hiatus of four months. Although the organization’s expenses exceeded revenues by $1.4 million in the 2002/03 season, it succeeded in A u th o ri ze d f o r u se o n ly in t h e c o u rs e S tr a te g ic M a n a g e m e n t a t U n iv e rs ity C a n a d a W e st t a u g h t b y D r. S h e rr y C a m p b e ll fr o m 7 /1 2 /2 0 2 1 t o 1 0 /3 /2 0 2 1 . U se o u ts id e t h e se p a ra m e te rs is a c o p yr ig h t vi o la tio n . Page 6 9B06M064 raising $1.6 million in working capital, which eliminated its deficit. Unfortunately, by this time the CPO had exhausted most of its endowment. Even with the new variable pay plan, the Transitional Leadership Team recognized that without a steady stream of investment income, the CPO was at real risk of falling back into financial difficulties. Consequently, in late 2003, Bregazzi and the CPO board created three mechanisms to generate reliable income from investments. First, the CPO built an $800,000 financial reserve with the help of donors. Second, some of the CPO’s community supporters helped to develop a $3 million to $4 million loan trust. In this scheme, donors loaned their assets (e.g. bonds) to the CPO; the income earned on the assets (i.e. interest) was paid to the CPO. “The drawback,” explained Bregazzi, “is that there is essentially no security attached to it. The assets are held by the lender, who directs the income to us. There is the hope that lenders will in time become donors and convert loans to donations.” Third, the CPO rebuilt and restructured its Foundation. By the end of the 2004/05, the Foundation had a market value of close to $13 million after being depleted to about $900,000 just prior to bankruptcy protection. The changes at the CPO improved its financial health. By the end of the 2003/04 season, the CPO had eliminated its accumulated deficit. Most significantly, box office revenues were up from about one-third in 2001/02 to 40 per cent in 2004/05. During the same timeframe, government grants were down from about one-third of revenue to 23 per cent, with increases in fundraising, sponsorships and special events totaling 37 per cent. These financial indicators highlight that the organization’s refocus on the needs of customers and the community occurred and was, indeed, proving successful. By the end of its 2005 season, the CPO had posted its third consecutive surplus and had an accumulated surplus of over $360,000. As he pondered retirement in late 2005, Bregazzi mused about the CPO’s future prospects: We’re way too much hand-to-mouth. We’re by no means secure as we enter new seasons. We’ve had modest surpluses in the last two years, but they weren’t sufficient to trigger payouts [to musicians and staff]. We’ll make a surplus and likely pay out this year. But we’re still way too dependent on that kind of existence. [To ensure our future,] we certainly have to maintain the artistic quality. We have got to make sure that the product is not only a good, reliable product, but that it is constantly inspected, updated, refreshed and appealing to the changing needs of the consumer. You can’t just keep playing music written by a bunch of dead guys. Also, we must maintain the goodwill of the buyers out there. And the buyers are manifold, they’re not just the people buying the tickets at the box office. They are people like Imperial Oil, and Talisman and Royal Bank who are buying our space. They are advertising with us. We call them sponsors, but what we’re doing is becoming part of their advertising within the community. So we have to maintain their goodwill, and with their goodwill, their support. Sponsorships are a significant, if not substantial, part of our income. Similarly, when it comes to donors we have to maintain their goodwill and support by continuing to review, revise and revisit our product offerings. That is something that we hope to do. EDMONTON SYMPHONY ORCHESTRA: ADJUSTING THE EXISTING BUSINESS MODEL Edmonton was justly proud of its orchestra, which had celebrated its 53rd birthday in 2005. The Edmonton Symphony Orchestra had a reputation for music education and for bringing classical music to northern Canada. It was nationally recognized for its performances and interactive youth-oriented programs and it A u th o ri ze d f o r u se o n ly in t h e c o u rs e S tr a te g ic M a n a g e m e n t a t U n iv e rs ity C a n a d a W e st t a u g h t b y D r. S h e rr y C a m p b e ll fr o m 7 /1 2 /2 0 2 1 t o 1 0 /3 /2 0 2 1 . U se o u ts id e t h e se p a ra m e te rs is a c o p yr ig h t vi o la tio n . Page 7 9B06M064 was the first symphony orchestra to perform in the Northwest Territories and on a First Nations reserve. It had 56 core musicians and performed a wide range of music. In September, 1997, the ESO moved into the Francis Winspear Centre for Music (Winspear) — an impressive concert hall located in downtown Edmonton. The same month, over 60,000 people visited the Winspear to welcome the city’s latest landmark. THE CITY OF EDMONTON Located nearly 300 kilometers north of Calgary and 300 kilometers east of the Rockies, the City of Edmonton was a government and university town, the provincial capital, and home to Alberta’s largest university. Many of the region’s one million inhabitants believed that they lived in a cultured city that enjoyed and supported the arts. The University of Alberta, founded in 1908, received much of the credit for bringing fine arts to Albertans. Population growth was expected to be marginal in the coming years, at approximately one per cent. Average disposable income per capita was approximately $26,500 in 2004 and was forecast to grow at between three per cent and six per cent until 2006. RECENT CHALLENGES AT THE ESO In the two years following the opening of the Winspear, the ESO enjoyed substantial community support and involvement. Its financial performance reflected that excitement. In 1999, the ESO’s chief executive officer left the symphony. His departure coincided with a fading of the euphoria from the Winspear. Trombonist John McPherson outlined some of the concerns that the musicians also had at the time: Our perception was that [management and the board] were relying on the Winspear Centre to draw people in. The management and board were not proactively building fundraising strategies and taking a close look at their management style and promotion and marketing. We were coasting on the bubble that was created by the excitement of the new hall. Though things looked alright, there was a dysfunction that was creeping into the organization: lack of communication, lack of honoring all the different stakeholders. It felt fractured. And the numbers just weren’t adding up. After the hall was opened, it appeared to the musicians that the money that was coming in was going towards subsidizing the hall, the management was growing in terms of numbers, the percentage of the budget spent on the musicians’ salaries became smaller while the administration's share of the budget rose. Moreover, like most other orchestras and performing arts organizations, the ESO could not survive on ticket revenues alone and it relied on government grants to make up the shortfall. Increasing costs forced the ESO to turn to fundraising to balance their working capital. Then, in 1999, several fundraising employees left the ESO, creating a gap in fundraising experience. The board saw a looming financial crisis, but did not respond decisively for several reasons. Board member Dick Cotter reflected on the situation the ESO faced: A quick solution to cutting costs would have been to reduce the number of performances. But we superimposed the fact that we had a labor agreement with musicians and we didn’t A u th o ri ze d f o r u se o n ly in t h e c o u rs e S tr a te g ic M a n a g e m e n t a t U n iv e rs ity C a n a d a W e st t a u g h t b y D r. S h e rr y C a m p b e ll fr o m 7 /1 2 /2 0 2 1 t o 1 0 /3 /2 0 2 1 . U se o u ts id e t h e se p a ra m e te rs is a c o p yr ig h t vi o la tio n . Page 8 9B06M064 want to file for bankruptcy to break the contract. . . . Superimpose on all that the fact that musicians did not have sufficient say in the organization. They were a large stakeholder and should have been better represented at the board level. Conducting Disharmony Grzegorz Nowak was the ESO’s internationally renowned musical director and he had been with the orchestra since 1994. The musicians were generally very supportive of Nowak because they felt secure under his direction and believed that he brought out the best in them. Conversely, Nowak and the ESO’s board conflicted on many issues. One of these was his non-ESO commitments. A great part of Nowak’s time was spent with other orchestras in Europe; he was frequently away from the city and unable to help with community fundraising. Early in 2000, the ESO’s board decided that it would not renew Nowak’s contract beyond the 2000 season. Nowak responded with threats to sue for defamation and breach of contract and to start his own competing orchestra, a bigger orchestra that would offer musicians drastically increased pay and more opportunities to perform. The competing orchestra never materialized. Andy Sims, who had mediated past contract negotiations with the musicians, described the reaction in the orchestra: The musicians saw this as an attack on their maestro (and without their input). It’s the musicians, not the board, who had the chief say in who was selected as the musical leader. So their view was that they should have a say in who is fired. The board clammed up and said nothing. And the board was not representative of the musical community, so the cues to the community that would normally bring support for their decision weren’t there. Meanwhile, things were also in turmoil on the management side of the organization. By the 2000/01 season, the ESO’s services5 were up to 314 from 270 in the late 1990s, which increased the orchestra’s cost of remunerating musicians. The ESO had posted a $400,000 loss in June of 2001, creating a negative fund balance (see Exhibit 5). Five months later, the board replaced the chief executive officer with Elaine Calder (the position was later renamed to managing director). Calder brought strong financial and managerial skills and had experience dealing with performing arts organizations in crisis. She was determined to create … Final Assignment Overview Report:  Title page, use questions as headings, cite all research with reference page, APA 7th Edition style. Maximum page length requested is 10 pages total. There can be exceptions but this should only apply to adding content that is of quality. An appendix can be added as needed for a diagram, visual, etc. In the report, use APA 7th Edition style and include the following: Cover page with name of case study and student details, course number, professor. Summary of Case Study. Use each question as a heading and answer each question citing all resources used. Provide a reference section for all resources cited. Maximum length 10 pages excluding cover page and reference page. Presentations: As above except maximum slides is 12, with title slide, reference slide, and 1-2 slides per question. Presentations must be recorded. The presentation should be no longer than 10 minutes.  Cover slide, case summary and questions posted on slides with responses. Record presentation. Report Questions: Start with case summary, then use questions as headings before answering and citing resources. 1) Compare and contrast  a) the approaches that the CPO and ESO took to their turnaround (sample table below) and b) the financial outcomes 2) Why did the CPO and ESO take such different approaches? 3) Which organization is better positioned for stability? PRESENTATION QUESTIONS:          1) Non-profit boards can play many roles. What do you see as the role of the board in management oversight? Explain. 2) Although the perception around turnarounds in crisis situation is that it calls for drastic measures there is considerable latitude. Analyse turnaround strategies from the perspective of: a) environmental analysis b) resources and capabilities analysis c) management values/preferences analysis 3) As a result of the different factors the organizations may craft different strategies. Point out how the turnaround strategies of the CPO and ESO differed and explain the differences based on the above analyses.